As expected, Goofus and Gallant got jobs after college. Goofus stashed his liberal arts degree in the bottom of the footlocker he used as a coffee table, and went to work in a succession of retail situations. His favorite stint was at a used bookstore, but it paid the least. He spent most of his time in a coffee boutique before he opened his own small business.

He named his place the Choo Choo Chain partly because he expected to own more than one. It turned out that corporate expansion was decades away. But the single store thrived; the coffee was good and the train sets drew scads of playful customers, with and without children.

Gallant took an MBA before he left school, and then walked right into an office job, at a business big enough to have a well-defined ladder. He landed in the human resources department, and he advanced as expected.

For the first year or two Gallant outearned his old playmate. But Goofus worked long hours and caught up; then their pay rates were just about equal. And both began saving for retirement at the same time and at the same levels. But the plans were different and their account values soon diverged.

Gallant was eligible for his company’s 401(k) plan. His employer offered to match 100% of the first 5% of pay that an employee contributed. Gallant listened to financial advice; he made sure to contribute 5% of his pay as 401(k) so that he got the maximum (5%) match. Ten percent of his gross compensation went into the plan every year.

He always had a wide choice of investments. His employer had read the fee disclosure material and shopped carefully, so that Gallant’s account was only charged 0.75% (75 basis points) for recordkeeping and other necessary services.

Goofus’s situation was quite different. He was self-employed, so retirement plan design was up to him. He aimed to help his employees save, but he didn’t want the complexity of payroll deposits and pie charts. He read up on plan types and opted for a traditional profit sharing plan. He wanted to contribute 10% of pay for eligible employees, but his budget couldn’t do more than 5%, so he adjusted employee compensation (including his own) downward to pay for the extra 5%. He chose profit sharing instead of a SEP so he could use a vesting schedule to reward longer service, and so that all plan funds could be invested together. As far as he was concerned, it was a company plan and everyone would get the same return. At first he deposited the contributions into broad-based mutual funds. He delegated the job to a Registered Investment Advisor when the plan grew big enough.

It’s not really fair to compare the arrangements, but it is suggestive. After all, Goofus and his employees had more take-home pay (none of their benefit was subject to Social Security or state disability taxes). Goofus’s business paid less in payroll taxes. Administrative charges were much lower for the Goofus’s profit sharing plan than for Gallant’s 401(k).

Here’s what happened to the old friends’ account values, over the first ten years:

• A total of almost $108,000 was contributed to Goofus’s plan account. It grew to be worth about $137,300.

• For Gallant, almost $118,000 was deposited into the plan. Even though both accounts received contributions equal to 10% of pay, Gallant’s pay was always higher than Goofus’s. But after ten years of allocating his separate account according to his pie chart, Gallant had a plan account worth about $125,800.

Gallant’s a little annoyed about his plan. He’s been swamped lately with disclosures about the fees he’s paying, and he has noticed that ten years of contributing has produced about $8,000 in gain. Goofus is happier than his old friend. He’s considering the addition of a 401(k) feature, to let himself and his employees add to what the company contributes, but he has no intention of changing the pooled investment arrangement. He understands that past performance is no guarantee about the future, but he’s fairly optimistic about his retirement savings account.

Plan          Annual                   Contribu-                     Investment                  Account
Year           Pay                           tion                               Return                       Balance
Goofus:
1              $71,428.58           $7,142.86                         -10.07%                      $6,423.57
2               80,952.39             8,095.24                           -0.92%                      14,385.24
3             109,523.82           10,952.38                           36.33%                      34,542.78
4              110,476.20           11,047.62                           16.62%                      53,167.52
5              112,380.96           11,238.10                           11.81%                      72,011.92
6              119,047.63           11,904.76                           14.89%                      96,411.87
7              121,904.77           12,190.48                             7.92%                    117,203.66
8             123,809.53           12,380.95                         -28.31%                      92,899.21
9             114,285.72            11,428.57                           12.23%                    117,087.07
10           114,285.72            11,428.57                             6.87%                    137,344.66
Total Contribution:          107,809.53

Gallant:
1           $90,000.00          $9,000.00                          -19.65%                     $7,231.50
2           115,000.00           11,500.00                          -19.90%                     15,003.93
3           115,000.00           11,500.00                            15.38%                     30,580.24
4           116,000.00           11,600.00                              2.45%                     43,213.65
5           118,000.00           11,800.00                              4.13%                      57,285.72
6           125,000.00           12,500.00                            13.79%                     79,409.17
7           128,000.00           12,800.00                            11.12%                   102,462.83
8          130,000.00           13,000.00                          -34.68%                     75,420.32
9          120,000.00           12,000.00                            34.35%                   117,449.20
10        120,000.00           12,000.00                            -2.83%                   125,785.78
Total Contribution:          117,700.00